Conglomo, inc., a world-class producer of self-sealing stem bolts, is considering a revision to the formulation of the sealant used in the stem bolts. If the new sealer works as intended and Conglome proceeds with the project they will realize $1,000,000,000 in cost savings. If the reformulated sealer does not does not work and Conglomo, proceeds with the project they will incur a cost of $500,000,000 due to wasted materials and lost productivity. Alternatively, Conglome, can continue to use the old formulation at a cost of $400,000,000. A consultant has estimated that there is a 65% chance that the new formulation will work as intended. It is also possible to conduct a designed experiment (DOE) to determine if the formulation will indeed work. (2 points) Fill in the payoff table for this decision problem. There should be an entry in every box in the table below. State of Nature b. a. Alternative d. e. Prior Probability (2 points) Under the maximin decision criterion what should Conglemo, do? c. (2 points) Under the maximum likelihood criterion what should Conglome do? (2 points) Under Bayes' decision rule, what should Conglomo.do? (2 points) If Conglomo, is using Bayes' decision rule, what is the Expected Value of Perfect Information for this problem? Based on the EVPI you calculated, how much do you think would be a reasonable amount to spend on an experiment to determine if the new sealer formulation will work? c. |